Child benefit cuts: what are the government's options?

Nick Clegg today said that the coalition is looking at changing its plans to cut child benefit to high earners to avoid "unintended consequences" such as the penalisation of lone parents. What could they do?
Polly Curtis, with your help, finds out. Get in touch below the line, Tweet
@pollycurtis or email
polly.curtis@guardian.co.uk.

The coalition has confirmed that it is revisiting its plans, due to come in next year, to cut child benefit to higher rate taxpayers who earn above £42,735.

Nick Clegg told Sky News this morning that they wanted to tackle the "unintended consequences" of the current proposal to end the universal benefit. He included in this the central criticism of the current plans: that lone parents on £43,000 will lose their child benefit, while two-income households earning up to £85,000 would keep it. The moves come ahead of a debate on the plans in the Commons today, brought by Labour, and amid tensions among Tory backbenchers about the impacts of the scheme.

The government is facing a complicated conundrum: their current plans are unsustainable in the face of fierce opposition on the backbenches, but the tax system is based on individuals and any attempt to means-test households in order to taper awards of child benefit would be prohibitively bureaucratic and expensive.

If the government is going to end the universal benefits for families – and there is a separate furious debate about the rights and wrongs of this - what is the fairest way to do it?

I'm going to review the evidence on systems of handling universal benefits and the suggestions that have been mooted. Do you have any ideas or evidence that might help? Get in touch below the line, Tweet @pollycurtis or email me at polly.curtis@guardian.co.uk.

Analysis

Some 1.5 families would be affected by next year's child benefit cuts, saving the treasury £2.4bn, according to the Institute for Fiscal Studies [pdf]. The IFS report, published in January, said:

About 600,000 one-child families will lose £1,056 per year; about 700,000 two-child families will lose £1,752 per year; and about 200,000 families with three or more children will lose at least £2,449 per year.

• Lifting the threshold from £44,000 to a higher figure, such as £50,000, to lift more families out of the net.

• Halving the amount families in the higher tax threshold receive, rather than cutting their benefit entirely

• Cutting child benefit to higher earners once their children reach five to help them pay early years childcare costs.

The Daily Mail also interpreted the Treasury's statement last night, which said that it is was "not fair to ask someone earning £20,000 to pay for the child benefit that goes to someone earning £80,000 or £100,000", as advocating lifting the threshold to £80,000.

But none of these options actually removes the "cliff edge" effect, which would incentivise people to manipulate their earnings in order to keep receiving the benefit and penalise people for a small payrise that tipped them over the threshold. Nor would they ameliorate the effect of penalising single income households compared with double income ones.

The IFS suggested three alternatives to address these specific points. This is from their report:

A) Withdrawing Child Benefit through the income tax system, but gradually.

B) Integrating Child Benefit with the Child Tax Credit, but withdrawing it in the same way as the family element of the Child Tax Credit was formerly withdrawn.

C) Integrating Child Benefit with the Child Tax Credit.

I've just been speaking with Mike Brewer, the IFS researcher who worked on this report, and he says that option A tackles the "cliff-edge" problem, by tapering withdrawal above a certain amount. This would stop people losing money if they get a payrise that takes them over the threshold. But it would not address the problem of the single income household penalty. He said that the administration of this would not be much more complicated that the current plans, which already require new systems in the tax system to establish whether people live in single or dual income households and what their joint incomes are.

By taking option B or C child benefit would be integrated into the tax credit system, which is already set up to means-test household incomes. It could also be tapered to remove the "cliff-edge" effect.

Brewer acknowledged that there is a major stumbling block to this: it would be politically unpalatable to merge child benefits and tax credits because it would mean people no longer see a hard cash deposit into their banks. Although people would get the equivalent amount through tax relief it would no longer be a distinct payment. Brewer said:

This is about the politics versus the sensible design of giving the right money to the right people. The government already has a way to assess joint incomes through tax credits. You could probably devise others ways bolted on. But you're inventing a new way of means-testing when you don't need to because you already have tax credits and later universal credit.

From the IFS's in-depth work it's clear that the only solution to addressing both the cliff edge problem and the double income inequity is to use the tax credit system, but this would be politically all but impossible.

This is despite the fact that the IFS said that the scheme would be less liable to fraud and could bring in more money - between £bn and £5bn next year compared with the £2.4bn expected under the current plans, as this table shows.

Are there any other options that would make the system fairer? Do get in touch with any thoughts and I'll update the blog later.

12.10pm update:

Graphic

In the daily morning briefing with journalists, Number 10 has clarified that the prime minister is concerned about the "cliff edge" issue and suggested that the changes will be announced as part of the budget on March 21. Paul Waugh, editor of Politics Homes, tweets:

More No.10 on child benefit: "The PM has said that we will look at this issue of the 'cliff edge' + that's what we are doing"

This does seem to indicate that the options reported this morning in the papers – of raising the threshold to £50,000 or £80,000 – are unlikely to be adopted because that means there is still a cliff edge. But the very well connected Spectator political editor James Forsyth has just blogged suggesting that at the end of last week that was seen as the most likely option. The fact that Number 10 is being very forthcoming on this issue is a sign that they are rattled by the backbench opposition to the plans and although they are far from a solution to their conundrum they are avoiding rebellion by showing willing.

2.53pm:

Summary

The Treasury faces a seemingly impossible conundrum in order to continue with its controversial plans to cut child benefit for higher earners and prevent a backbench rebellion.

The current plan, to cut child benefit for households that include one higher rate tax payer, has three major problems: it disadvantages single income homes – a couple could jointly earn £80,000 and still receive child benefit while their neighbour, a lone parent on £43,000 a year, would lose it.

It creates a "cliff edge" effect whereby there is a dramatic financial penalty when people move up a tax bracket, losing child benefit at the same point as their tax rate doubles. One reader of this blog said they would bump up their pension contributions to remain a basic rate tax payer. The Treasury acknowledges it would lose 15% of the savings from fraud and legal systems of avoidance.

Finally, there are huge bureaucratic burdens. The tax system, based on individuals, would have to devise a way to assess household income. Number 10 has now said that they will deal with these "unintended consequences". But the suggestions over the weekend, including simply raising the threshold to £50,000 or £80,000, fail to resolve the main stumbling blocks.

There is one simple solution: The Institute for Fiscal Studies has argued that the government could top tax credits up to the tune of child benefit and taper it at the upper end to achieve the same £2.4bn savings. When the universal credit is introduced, this could be even more straight-forward. In fact, the IFS says, it could easily achieve up to £5bn.

Although this option solves the fairness and practical issues, it also would mean that child benefit would no longer be a distinct payment. If ministers are beginning to learn how attached people are to child benefit, merging it with other benefits would certainly be a step too far. Mike Brewer, author of the IFS research, said: "This is about the politics versus the sensible design of giving the right money to the right people. The government already has a way to assess joint incomes through tax credits."

Below the line there has been a fascinating and thoughtful debate about alternatives to the government's plan. Several readers described how the changes would affected their family. @PeterinSQ said he would increase his pension contributions to remain just below the threshold - pointing out that that achieves the government's goal of encouraging people to save. @ajchm writes:

We are one of those families, single income of £43k, we would be better off taking a £600 pay cut if the measure are not changed, this cannot be fair. I cannot work as we have a disabled child who needs frequent collection from school, our carers benefit has been removed under the new assessment regime, which is highly focused on whether a person can walk 100 yards, and seems to fail to take into account epilepsy! The only truely fair system is to make it a joint household income threshold, whatever that may be, and whilst we are at it, families should be able to to file taxes as a unit (if they wish) so EVERY person gets to use their tax free allowance.

@muscleguy describes how in New Zealand income is assessed by household rather than individual, though others points out that this could lead to other inequities.

Several readers suggest that there are fairer ways to tax the rich without penalising famlies as opposed to households without children. @IanRF writes:

Simply replace the policy with a 1% increase in NI contributions for higher rate tax payers, from 2% to 3% on earnings above the £42475 threshold.This would be:• much easier and cheaper to implement;• there would be no cliff-edge or two-versus-one earner anomalies;• it's a lot fairer as it means childless higher rate taxpayers also contribute to deficit reduction (currently they get off scot-free, so we're not 'all in it together') and;• it doesn't cross the Tory red line of raising income tax as NI is (supposedly) not a tax.Simples!